German government bonds gave back part of their earlier gains as escalating tensions in the Middle East pushed energy prices higher.

French government bonds also trimmed their advance, yet still outperformed their euro-area peers, putting the spread between French and German bonds on track to end a five-week widening streak.

Traders moved to ramp up their bets on European Central Bank rate hikes, now pricing in 23 basis points of increases by year-end and 75 basis points by the end of 2027, compared with expectations of 21 basis points and 69 basis points shortly after the open.

France set the size of Thursday's government bond auction at between 10 billion and 12 billion euros, in line with analyst expectations.

Crude oil rose 0.6% to $104.92 a barrel, having earlier fallen as much as 1.9%.

UK government bonds also gave back some gains, though the yield curve still maintained a bull-flattening trend; traders raised their Bank of England rate hike expectations by as much as 6 basis points, now anticipating 23 basis points of increases in November and a cumulative 111 basis points by the end of next year.

Market levels: German government bond yields fell 1 basis point to 3.49%; German government bond futures rose 17 ticks to 120.84; Italian 10-year government bond yields dropped 3 basis points to 4.57%; French 10-year government bond yields declined 4 basis points to 4.85%; 10-year UK government bond yields fell 4 basis points to 5.45%.